Monday, September 20, 2010

JPN ≠ US: Japan Is Not Us

“Twins separated at birth”?

Really . . .

Japan went through an equities and real estate boom during the 1980’s—a boom that was really a bubble. And like all bubbles, it eventually burst in 1990. Since then, Japan has been lost. Equities have never again reached the heights of 1990, nor have real estate prices. The Japanese government has spent a fabulous amount of money for domestic stimulus, creating the most modern infrastructure on earth—yet it hasn’t helped at all. GDP has been anemic, as the population slowly begins to shrink. Japan is in full-on deflation—in every sense of the word. Now that the United States has had its own real-estate bubble pricked, a lot of smart people have been selling the idea that the U.S. will experience what Japan has experienced: Persistently sluggish growth. Continued fiscal deficits, carried out by the Federal government in order to prop up aggregate demand by way of various stimulus programs. Slow and painful working out of the debt overhang. All of this happening within a deflationary environment, whereby the dollar—just like the yen in Japan—accrues value, as full-throttle deflation sets in. In other words, this camp believes America is set to begin its own version of Japan’s Lost Decades. This camp falls for what I call the “Japan Is Us” fallacy—and they are wrong. Their rationale is simple—and superficially persuasive: Just like Japan in 1990, the United States went through a bubble in equities and real estate, which eventually popped in 2007–‘08. Since then—just like Japan—the U.S. has been experiencing deflation. Just like Japan, the U.S. now has zombie banks, the so-called “Too Big To Fail”. Just like the Japanese government, the U.S. government is spending-spending-spending, so as to prop up aggregate demand. The Federal Reserve—just like the Bank of Japan—is issuing enormous sums of money in order to prop up aggregate asset price levels—the Fed’s policies are so reminiscent of the BoJ’s money printing that Bernanke & Co. have borrowed the term outright: Quantitative easing. Everything screams Just Like Japan—right? So according to the “Japan Is Us” camp, 2010 through at least 2015 will be just like Japan between 1990 and 2010: Sluggish growth, stagnation—and most important of all, deflation, deflation,deflation. But there is one key difference that the Japan Is Us crowd conveniently ignore. They ignore it out of blindness, or incompetence, or—occasionally—out of malice. They ignore this key issue like the elephant in the room that’s gone and got drunk, and is now making a fool of himself: Balance of payments. Balance of payments (BOP) is the measure of a country’s total exchange with the rest of the world. From the Federal Reserve’s “Fedpoints”:

The balance of payments is an accounting of a country's international transactions for a particular time period.

Any transaction that causes money to flow into a country is a credit to its BOP account, and any transaction that causes money to flow out is a debit.

The BOP includes the current account, which mainly measures the flows of goods and services; the capital account, which consists of capital transfers and the acquisition and disposal of non-produced, non-financial assets; and the financial account, which records investment flows.

(Emphasis added.)The current account is the key metric: It’s the net balance between imports and exports. In other words, the trade surplus or deficit. As everyone knows, the U.S. current account has been negative for a long, long time—in fact the last time the current account was in surplus was 1973. Since then, current account deficits have totaled about $7.5 trillion in nominal dollars. (Data is here.)Japan, meanwhile, has had a current account surplus. I found a nifty chart that neatly summarizes the differences between the two countries:

Current account surplus/deficit per country as percent of world GDP. De Mello/Padoan.

(Original chart by Luis de Mello and Pier Carlo Padoan can be found here.) To finance this massive current account deficit, the U.S. has sold assets to the rest of the world. The U.S. Federal government has gone into deficit spending on top of this current account deficit—it too has sold assets to cover the fiscal deficit. So in a net sense, both the U.S. Federal government and the United States as a whole have “sold assets” to the rest of the world, in order to pay for their spending. What “assets” have been sold to pay for all this spending? Basically, Treasury bonds. And as everyone knows, Treasuries might be called “assets” by the sophisticates, but they are really nothing more complicated than a loan. In other words, Americans and their government have gone into massive debt with the rest of the world, in order to finance all this spending. Japan, meanwhile, has been carrying a current account surplus. Therefore, the Japanese government has been borrowing money not from overseas, but from its own citizen’s savings. All of the Japanese government’s stimulus spending has been paid for by the Japanese people. This is the main difference between the United States and Japan. It should be obvious—and ominous—what this difference means. The U.S.—unlike Japan—cannot pay back its loans: Because the United States is broke. The Federal government is running deficits of around 10% of GDP. America as a whole has racked up $7.5 trillion in current account deficits over the last 25 years—over 50% of total GDP—with no end in sight. So the United States—unlike Japan—has been spending what it does not have. The U.S.—unlike Japan—depends on the rest of the world to lend it money to continue on this spending spree. Americans—unlike Japan—do not produce enough to self-finance its government’s stimulus programs.

Therefore—unlike Japan—the United States will eventually be unable to pay the Treasury bonds it has issued. Therefore, as I wrote inA Termite-Riddled House, there will be a collapse in the Treasury bond market. Therefore, as I wrote in How Hyperinflation Will Happen, a panic in Treasuries will mean a run up of commodities—which will bring about the death of the dollar, and hyperinflation in America.

This is why Japan Is NOT Us.

But even if you don’t subscribe to my hyperinflationary scenario—even if you think I’m full of shit on this issue (and plenty of sensible people think I’m full of it to the brim)—it’s obvious that Japan is not like the United States—it’s obvious to anyone who looks at the situation evenhandedly: The contrast in the two countries’ balance of payments is enough to show definitively and unequivocally that they are not the same.

The source of the two countries’ funding is key: One produces its own stimulus from its current account surplus, while the other borrows it from abroad, adding more debt on top of its already existing debt. Therefore, one country’s spending and stimulus programs—Japan’s—are sustainable, while the other’s—America’s—is not. Which means that the mechanisms for this fiscal debt—sovereign bonds—are rock solid in Japan, but lethal in America.

So if it’s so obvious that the two countries’ situations are so different, then who is selling this clearly false notion that Japan Is Us?

Why, people who have a vested interest in this point of view. People who are selling things. Or people who are trying to explain away why they have lost so much money by making the wrong bets.

For instance, money managers. A lot of pseudo-Austrian money managers in particular have been doing the hard sell to their clients, insisting and insisting that the U.S. is experiencing Japan-redux. They have been steering their clients’ money to Treasury bonds—because if you were in Japan in 1990, their sovereign bonds turned out to be the smartest investments in the long run.

But as we have seen, the U.S. is not Japan.

So these money managers who are playing the Japan Is Us trade have either lost their shirt, or are terrified that they are about to. Because everyone knows that U.S. Treasury bonds are overpriced, and that it’s only a matter of time before this Treasury bubble pops.

And when it pops, it will be bad—a lot of people counting on the United States following in the footsteps of Japan won’t just lose a bit: They’ll lose huge. They’ll be wiped out—or maybe they won’t be wiped out, but their clients sure will be.

That’s why so many people keep insisting that Japan Is Us!-Japan Is Us!-Japan Is Us! They are selling their clients on something, or else trying to explain away their underperformance, by sheer force of personality—while ignoring the blindingly obvious fact that the U.S. is not Japan.

One prominent blogger in particular has been going insane, insisting day after day that Japan Is Us, to the point of psychosis—evidence to the contrary be damned. Every day, this blogger—Michael “Mish” Shedlock—bangs on the same old tired drum. Mr. Shedlock is affiliated with Sitka Pacific, whose performance leaves something to be desired. There are, apparently, a number of Sitka Pacific clients quite nervous about the direction of their investments. So it is reasonable to question whether Mr. Shedlock is ranting and raving how the U.S. is following the deflationary spiral that Japan did because he genuinely believes what he is saying, or because he is trying to convince someone—maybe his clients, maybe himself—of something that he knows in his bones might not be true.

What is true is that anyone who has made bets that Japan Is Us will soon find out if they were wise bets, or foolish ones. The Treasury bubble is soon to burst—so we’ll know the fate of the American economy soon enough. If those bets turn out to be foolish—if it turns out that, indeed, Japan Is Not Us—just keep in mind one final fact: An average person can survive a leap from a third floor window, even a fourth floor window. But a leap from a fifth floor window or higher? That’s how you get the job done right. You jump from a fifth floor window, and you’ll go splat!—guaranteed. Full disclosure: I do not manage any money except for my personal stake and my family’s private interests. I do not provide professional investment advice to anyone. I am not affiliated to, nor am a spokesman for any third party investment or financial company. I do not endorse any product, save Head squash raquets, Slazenger squash balls, Montecristo (Cuba) cigars, Cálem vintage port wines, and Durex X-Treme X-Long X-Large X-Tra Comfort condoms.

42 comments:

You make a good case. There is no doubt some sort of drastic dislocation is coming. I asked Mish in a comment about this recently. If there's deflation (which there seems to be), and the massive deficits are bad (which he says), then what are the consequences? There MUST be consequences, right? Yet, he keeps insisting on an orderly, but massive, deflation, for the time being. Does this make sense? Not to me. Obviously, the gaming, and the borrowing, and the manipulations, can keep going, until they can't. It seems he is saying that "until they can't" is a long way away at worst.

However, I don't think Mish is unhinged. I remember quite clearly how he was calling for a dollar and Treasuries rally in the the pit of 2008, when EVERYONE was calling for $200 oil and a dollar collapse.

"There are, apparently, a number of Sitka Pacific clients quite nervous about the direction of their investments."

Words like "apparently," and "allegedly," and the like are convenient weasel words. Are there, or aren't there, nervous Sitka clients, and how do you know?

I know too little about what was hapenning to Japan at the beginning of their slump. US is for sure in big troubles but I would not differentiate too much between domestic lenders and foreign lenders. In both cases japanase people owning japanese bonds and foreigners owning US bonds are in complete denial of the quality of their investment.

No group is willing to accept that their investment is of junk grade and must be liquidated as quickly as possible. They hope that they can do better by holding onto them. It is because of this ignorance I give USA a bit more time then you and me are willing to give. The bonds may be a good play for some time but eventually it will be the worst place to be.

Mish may be right on many aspects and he raises many interesting points but he is so full of himself that his clients will be paying for it. Nobody can time the market perfectly and he is bashing their competitors for not doing so. There will be time when his bad timing will be something many people will remember. He will ride the bond bubble market for one crucial day too long.

@ GLJapan's lost decades it's not the only deflationary scenario. The second deflationary scenario is 30'es in US and 2001 Argentina. With destruction of M3 money suplly, cash become precius and especially investments goods look very cheap. This scenario is, I think equaly possible - if argentinian style collapse will happen in any european country - it may cause chain reaction, similar of 1932, and deflation - sudden and very painfull. And it will happen. The only question is, what will come first - Your or my scenario.@ radekJeśli znasz polski- a po nazwisku zgaduję, że tak, zapraszam na mojego bloga

I read Mish daily and have read your recent articles. The one thing I wish is all of the people in the "America is screwed" camp would quit beating each other up. Both you and Mish actually agree on major points, you just disagree in the manner which the problems will show up. From what I have read, Mish does not believe that "Japan is US" and that we will follow a different path. Everyone in the "America is Screwed" camp needs to stay united if we are ever going to change things here in the USA.I appreciate reading both of your points of view. But I do agree with Mish right up until I don't, by that I mean that I believe we will have deflation and some inflation on select items until the SHTF, and then the FED's reactions will and are causing hyperinflation.

Gonzalo Lira? What sort of name is that!? I first read from you that us t bonds would suddenly collapse throwing the usd into hyper inflation! Now you write that the balance of trade is a big boogie man!! Are you scaring the children? We have more nukes than anyone else, why can't we just profit off them? Who else can stand up to us? Can we not endlessly extort money from the rest of the world? You know like "give us your stuff or we will destroy the planet"! Why can't we do that?

My compliments. Your take on most economic subjects is mostly parallel my take. Like that comment , "we feel comfortable among those who tend to hold similar ideas'.

As for your social comments, I can't be sure. I've been on this planet for 84 years and still am confused with the subjectivity exhibited by others. I suppose that social objectives are, well, really subjective. Someone mentioned years ago that it's easier to see the speck in another's eye than the beam in one's own.

Gonzalo you sound a little emotionally guided in your assessment.I think the US being the reserve currency will make more difference than any other factor but there are so many variables, it is good to read articles like yours and learn what might happen. It is more of a worry that a communist (and corrupt by most accounts) country may become the dominant player .

Those two girls are both wearing inexpensive sparkly things on their heads and make-up....But one may be smarter than the other. If the currency game and gov finance is heading down the toilet ; wouldn't you rather at least have a functioning infrastructure?

You should be ashamed of yourself, Lira. The way you try to put dirt on another person shows you for what you really are. How about prove of all accusations and allegations that you make? I applaud Mish for not responding to your barking. It also pays off to be humble which you are not.

Recently another writer made a good case for hyperinflation or at least a slow equivalent. The writer pointed to compound interest on a mountain of debt would require wave after wave of inflation. Around a decade ago it took over 40oz of Gold to purchase a share of the Dow 30 Industrials. Today it only takes about 8oz of Gold to purchase a share of the Dow 30 Industrials.

Surprised you didn't mention the Greenspan-Guidotti condition, which now, applied to the US (likely not intended by its nominal authors), would put us in the "bankrupt" category (default or devaluation certain).

For those following at home, it means the US doesn't even have the assets to pay off its official short-term loans to foreign creditors.

What folks don't seem to recognize is that a few financial sociopaths are behind the financing of most countries. If you study the Barings, they financed Russia, the U.S., Argentina, etc. And that's just one group that's been documented. Sure, they're not around any more, but were folded into ING. Financial sociopaths promoted the Cold War, and decided to pull credit on Russia first, collapsing their bonds and Long Term Capital in the process. The same nonsense is now happening in the States. Geez, how do you think China recovered from Mao? These sociopathic financiers took money from U.S. citizens retirement funds, pension funds, etc. etc. and invested it in China, using Wal-Mart as the conduit to import goods, forcing manufacturing off-shore. Barclays was formed in 1690. Scotia Macotta was formed in 1671. Among others, you'll find them at the root of most problems. Of course, they'll deny it. Like Balzac said in 1850, "Behind every great fortune is a great crime."

.... this is so facinating to me and I only stumbled upon economics a couple of years ago. When I try to talk about this sort of thing, no one else in the trailer park can grasp the subtlety of the crafty, cunning, devious, dodgy, scheming, shrewd, slick, sly, artful, tricky, and wily ways the banksters have screwed us.

The comments here are as enlightening as the article. We are indeed livng in interesting times...........

US Treasuries now is the lesser of the evils. There are no real alternatives at this point of large enough a scale for those seeking relative safety to flight to. The moneyed class and sovereign funds are too deep in UST to do anything stupid to detonate and blow the thing up which will also seriously wound, if not destroy, themselves.Might as well stay put if there's no place to hide.

To me, the inflation/deflation discussion is boring because it barely takes into account the crafty, cunning, devious, dodgy, scheming, shrewd, slick, sly, artful, tricky, and wily methods employed by those in power to continuously enrich themselves at everyone else's expense. There is so much of it going on everywhere that now, anything made of paper is suspect. My intrepretation is that inflation/deflation are just measures of this flippin' paper! And aren't they printing more paper everyday, even as the value of the previous paper cannot be determined (OTC derivatives)? Seems like it wouldn't take much of an education to predict that eventually, honest money will emerge from REAL COMMODITIES as investors open their eyes to the fact that they are awash in toilet paper. You've nailed them to the wall GL, and they ain't comin' down.

Thanks for the compare and contrast lesson. The U.S. is worse off than Japan as you've pointed out.

I think ATP (comment above) has a good point. All these wealthy, connected, powerful elites are dumping money into Treasuries. If they control the game, why would they blow it up on themselves?

Limited by my current level of understanding as I am, I'm going to venture a guess and say that the inner circle will know just when to get out of Treasuries and in to China, emerging markets, gold, commodities, agricultural land, oil....whatever they decide is the next bubble.

The TBTF banks and multinationals are now loaded up with free cash from the Fed thanks to Bernanke and the American taxpayer. They've seen the writing on the wall and will get out of the dollar and Treasuries at just the right time. Unless your on Geitner or Bernanke's speed dial, you won't know and will be left holding the bag.

I'd love to you right an article about where you think the elites have their money now and where it will go next.

That 'blog' - albeit informative and detailed, is basically a daily exercise of justification for the premise of 'Deflation'. Somewhat like a hot-rod prosecutor, searching under every rock for 'evidence' to support/justify his accusations.

Many here might remember how he (and Karl Denninger) took Peter Schiff to the woodshed a couple years back. Unprovoked, I might add, putting his philosophy down while extolling the virtues of their more 'conservative' approach into vehicles that were the most 'secure' of all during uncertain times.

I also remember him calling John Williams a 'fool' on his blog about 3 or 4 months ago. Again, Unprovoked.

He's a smart man - make no mistake, and he does his homework - albeit that homework can sometimes be presented in a manner that bolsters his position. CPI quotes for instance...

In any event, the U.S. is highly likely not to 'muddle through' anything. We are a 3-second, sound-bite, emotionally-driven society, that has little patience to 'muddle through' anything.

Decisions are going to be made (liquidity) when they need to be made, as per the time-tested method of sticking a wet index finger in the political wind to see which way public sentiment is trending.

Given the level of corruption, greed & graft, would you really expect us to 'muddle-through' and 'Deflate', coming out the other side all the more honest for the better?

"Therefore, one country’s spending and stimulus programs—Japan’s—are sustainable, while the other’s—America’s—is not. Which means that the mechanisms for this fiscal debt—sovereign bonds—are rock solid in Japan, but lethal in America"

Before I make a quick rebuttal to this, let me say I'll smoke a Cuban with you anytime. At any rate, Japan debt is at the provibial tipping point--the end to Keynsian theory. In a nutshell, Japan's aren't rock solid, not even close. The Pavlovian warmth might lay with JGB's, but it will end badly.

Fundmentally, they are doomed. Japan's tax revue don't cover their basic necessities anymore--Social Serurity, Debt Service, and Education. With the savers spiraling down to a negative savings rate, with GILF havine to sell JGG's for pensioners, they will start to have a hard time just rolling their debt over, let alone issuing new unfunded debt.

In fact, Japan will ironically be your tipping point for fiat disaster. To fund their own Treasury, they will have to unwind their U.S. Treasury position. As they do, the noticealbe beginning of the collaspe of the U.S. dollar will ensue.

You are wrong, unless of course, you believe the Treasury can print up tens of trillions (if not hundreds of trillions) of paper FRNs overnight and have them delivered to everyone's bank account the next day, and that banks will remain unaffected by a systemic collapse of the 'dollar'.

I don't think you fully grasp the nature of our 'money', even though Iceland has provided you with an almost perfect example of what happens to a CREDIT based currency when a nation's banks fail.

You're talking about the failure of the world's reserve currency, which is for the most part digital credits held and administered by banking institutions around the globe, banking institutions that are, for all intents and purposes, already insolvent.

Yet you expect that these same institutions will remain unaffected and intact and administering the digits that constitute the bulk of our currency at a pace that will support hyperinflation.

Insightful as well as factual. GL has got this right again. Our currency is backed by only one thing, confidence, and TPTB are doing everything possible to destroy this daily. When that happens, soon IMO, the bond market collapse Gonzo describes will be brought to fruition. If I have one problem with Mish it would be his constant union bashing. It never stops. Get rid of unions, almost daily. This is exactly the kind of non-skilled elitist attitude that made the creation of unions viable to begin with. The trade skills and physical labor required to do this work is what has given people like Mish the modern civilization they can now so callously tear apart. Next time you are being routed very rapidly through a building tower onboard a union-built express elevator, be very thankful a $6 an hour day labor or a Sitka Pacific broker,did not install the moorings,

* Quite a few of those Japan-is-Us folks actually believe what they preach. I blame their professors and teachers for not teaching their students that they will be totally lost out there without answer key.

* The first 20 yr of Japan's troubled era was when the US and most of ROE had a problem opposite to that of Japan. So, Japan could harvest surplus and also save. Once the US and the euro zone cannot import like before, Japan will have to start dealing with its gov deficit problem, suddenly. US dollar falls -> No more current account surplus for Japan and very depressing export market condition -> no more capacity to save -> Japan cannot spend no more -> Japan soon follows Us

Lets draw a conspiracy theory scenario, just for the fun of it. Because only under THIS scenario it ALL makes sense!! I am an economist myself and the market movements recently are so unnatural, that I start looking for answers elsewhere....

Bilderberg Group's alleged goal of introducing a world currency requires the established big currencies to fail. The Euro will do that by its very nature (which was the intent from the start), the USD on the other hand needs some "help" by the FED.

Thats why they keep blabbering about deflation, while inflation is set to eat us alive. Take a look at how inflation was defined under Clinton - by those means we would now have something like 5%, under the new definition (re-arrangement of basket) they can claim we have below 1%.... frightening, dont you think? THe Euro has lost exactly 50% of its value after not even 10 years....but you dont read anything about it anywhere in the media!!

It is a FACT that the FED is a private institution and the regional FEDS are controlled by "old money"/ Rothschild empire consisting of 10 or so big Jewish banks. Also the media (such as Thompson Reuters) is controlled by members of the Round Table and US foreign politics are controlled by The Trilateral Commission (as Hillary Clinton just admitted herself). So dont believe a fu...ing word you hear or read anywhere.

OK, jst try to accept these thoughts for a minute, "what if....." is the exercise.

If we assume for a minute this is all true I would deduct that all the real big money is involved in the USD default plans, the "medium money" can go to hell, the small anyway.

The big money will simply get a smooth transit from old debt to new debt in some way that ensures that they continue owning the world, as before. The middle and small class are fu..ed and lose all wealth, exactly the intent of all of this.

Watch the stock market truning into a final immense bogus rallye in the next months, the intent here is also to lead all pigs to the final slaughter (mega crash). After that, the stock market will be dead.

I am curious how long it will take to establish rules that prevent us from owning gold again? under JFK this has happened before...

I am very concerned about the future and I have two little kids...I think the free times are about to end and we will have communists ruling Europe shortly. Its starting to happen.

Maybe I think too negatively because I am not getting enough sleep. But I fear the western world is going to get an ugly wake up call by 2012 latest.

USA as world police is also gone...run out of funds!! The UN is intended to take over this function soon, and guess who controls them? Think about it...

Regarding your podcast interview, specifically with respect to Mish's thesis, one that the interviewer seemed intent on promoting, there is a very stark lack of clear thinking from "the other side" of the argument.

To wit:

The idea that there is a "new feeling" about the land such that if "you are in, you are out" will lead, ineluctably, (after November) to the Feds and local government cutting furiously will not culminate in a purely "deflationary" outcome for the simple reason that tax revenues and consumer spending will collapse to such a degree that the government will find that they have even less wherewithal to service their already enormous debt.

At that point we will be much closer to the crisis in confidence that is the trigger of the hyper-inflationary crisis.

One thing you are not putting into the picture is that the US government will confiscate everyones 401k money in huge money grab. Then we will be like Japan. The wealthy will have already moved there money out of the US before the opportunity to do so is gone. Leaving the middle class broke.Maybe then we will have a real tea party.

It is my contention that the US is japan, but not for the reasons you might think.

I think the US is japan because, like the old saying, trees can't grow to the sky. The US time is almost up, and it is my contention that Japan is almost up, too. Having a trade surplus only means that you can borrow more, not that you can borrow indefinitely. Japan is at two hundred percent gdp and they're going to fall off a cliff soon, too, just like the US.

let me ask you if we differ from Japan in another OBVIOUS way....and a way that would help sustain a steady diet of foreign bond purchases.

THE reserve currency I.E the PETRO dollar....all govt's need to hold $$$ for when their OIL BILL comes due....petro dollar re-cycling sir...japan didn't have it (granted they don't need it with a acct surplus) but our petro dollar enables us (IN ADDITION to our abiility to monetize in the way you mentioned) to have a constant demand for gov't debt ..which comes in handy when you run current account deficits!!!..so this kind of makes your article a mute point..No?!

..now wether foreign buyers are scared to go out on the long end these days may be a better question.

This is because systems perform in the way they are designed perform. The idea that understanding economics depends on developing the correct economic theory is like thinking that understanding how a car engine works depends on developing the correct theory of engine operation.

Engines - and economic systems - operate the way they are designed to operate.

Our private central bank/fiat money system is designed to loot wealth from the pockets of wage earners. It confers the benefits of economic booms on those who have early access to the newly created money. The founders of our nation knew that a central bank/ fiat money system would impoverish our children and grandchildren, and they warned against it.

But real history is no longer taught in our public schools, or at the undergraduate or graduate level at colleges and universities. Compulsory school attendance and the continuing effort to regulate homeschooling out of existence are also part of the effort to keep people in the dark about what is really happening. Gonzalo and others like him are educating us thru the internet.

A new boom is being created as I type this. Trillions of new dollars are being created thru quantitative easing - electronic money printing - but no one is spending. When the Fed begins to tick rates up after the November midterm elections, inflation fears will begin to flood the system with all the cash that is currently sitting on the sidelines.

It will be the mother of all booms, which will in turn lead to the mother of all busts. The bust will be orders of magnitude bigger than any we have ever experienced.

After the bust of 2008, legislation was passed to allow the Masters of the Universe to bail out any entity in any industry at any time on their own authority without congressional approval - not just banks. It remains to be seen if the technicians rotating the dials will be able to act fast enough after the next bust to keep the entire system from imploding.

"In fact, Japan will ironically be your tipping point for fiat disaster. To fund their own Treasury, they will have to unwind their U.S. Treasury position. As they do, the noticealbe beginning of the collaspe of the U.S. dollar will ensue. "

Yes, I agree with this. Question is, why haven't the Japanese begun this process much earlier? There must be some outside factor that makes the Japanese behave in such irrational manor? Of course it's the Yanks. Japan has not really been a truly independent country since 1945

Keep in mind that both deflation and hyperinflation are depressions - which is now unavoidable.With deflation the edifices of the state would probably survive. With hyperinflation they will not.The rational choice for the government therefore would be to go for deflation. Which is also easier to achieve (no printing logistical problems). But whose to say they will be rational.

@markupspd"It is more of a worry that a communist (and corrupt by most accounts) country may become the dominant player ."This statement was really uncalled for and has no relevance what so ever to the topic. Also do you seriously think that the all other govts out there are less corrupted? Get real.

Trade deficits/surpluses do not equal national debt/cash. Japan's debt-gdp ratio is horrible and it's fiscal deficit isn't that much better than ours. A nation can very well have a balanced budget while importing, likewise, it can export a lot and still have deficits.

Having money behing held by outsiders rather than citizens doesn't mean much, citizens can sell their bonds en masse if they see imminent doom, or the country itself can do it by fiat like North Korea, Chile recently. It's harder when the money is spread around.

I am sure there is something to the difference between importing and exporting countries, but you didn't point them out. As for Mish, bonds have rallied since 2008. Why are you hating?